Dividend Reinvestment Plan (DRP)
A plan that automatically reinvests your dividends or distributions into additional shares or units instead of paying cash.
A Dividend Reinvestment Plan (DRP) allows shareholders or unit holders to automatically reinvest their dividends or distributions into additional shares or units of the same company or fund, rather than receiving cash. DRP shares are often issued at a small discount (typically 1–2%) to the market price, and there are no brokerage fees. This makes DRPs an efficient way to compound your investment over time.
Critically, for tax purposes, DRP dividends/distributions are treated exactly the same as cash dividends/distributions — they are fully assessable income in the year they are received, even though you didn't receive cash. The assessable amount is the gross dividend (including franking credits if applicable), not the DRP share price. Many investors are caught out by this, expecting that reinvested dividends are not taxable until the shares are eventually sold.
When you eventually sell DRP shares, you need to know the cost base of each parcel (the DRP price at which each batch of shares was issued) and the acquisition date (which sets CGT discount eligibility for a sale before 1 July 2027, and the transitional split and indexation for a sale on or after it). Over many years of DRP participation, you may accumulate dozens of small parcels with different cost bases and dates. Keeping accurate records — or using a portfolio tracking tool — is essential for correct CGT calculations when you sell.
How it works
A Dividend Reinvestment Plan automatically converts a dividend or distribution you're entitled to into additional shares or units of the same company or fund, instead of paying you cash. DRP shares are typically issued at a small discount, often 1–2%, to the market price, and there's no brokerage cost, which makes a DRP an efficient way to compound a holding over many years without needing to actively reinvest cash yourself.
The part investors most often get wrong is the tax treatment: a DRP dividend or distribution is fully assessable income in the year it's allocated, exactly as if you'd received it in cash — including any attached franking credit — even though you never saw the money and it went straight into new shares instead. That means you may owe tax on income you never physically received, and you need to fund that tax bill from some other source of cash.
Each DRP allocation also creates a brand-new parcel of shares or units, with its own cost base (the DRP issue price) and acquisition date, both of which matter for CGT when you eventually sell. Long-term DRP participants can end up holding dozens of small parcels accumulated over many years, each with its own acquisition date — which, on a sale before 1 July 2027, decides CGT discount eligibility parcel by parcel, and from that date decides each parcel's transitional split and indexation instead, which makes accurate record-keeping — or a portfolio tracking tool — essential when working out the capital gain or loss on a later sale.
Example: tax on a reinvested dividend
A shareholder is entitled to a $1,000 cash dividend but is enrolled in the company's DRP, so instead receives new shares issued at a 2% discount to the market price.
The full $1,000, plus any attached franking credit, is still assessable income for the year in which it was allocated, even though no cash was received — the shareholder needs to find the tax owed from other funds. The new DRP shares become a separate parcel, with their own cost base and acquisition date for future CGT purposes.
Related Terms
Franking Credits (Imputation Credits)
Tax credits attached to dividends representing company tax already paid on the profits, preventing double taxation.
Fully Franked Dividend
A dividend where the company has paid the full company tax rate on the underlying profits, with maximum franking credits attached.
Capital Gains Tax (CGT)
Tax on the profit made from selling or disposing of an asset, such as property, shares, or cryptocurrency.
ETF Distribution
Income distributed by an exchange-traded fund (ETF) to its unit holders, with tax components similar to managed fund distributions.
Managed Fund Distribution
Income distributed to unit holders of a managed investment fund, which may include dividends, interest, capital gains, and tax credits.